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The stock markets seemed pleasantly surprised at the price that Japan's Nippon Life Insurance paid for picking up a 26 per cent stake in Reliance Life Insurance. The better-than-expected valuation and the prospect of a cash inflow to Reliance Capital, the parent company, has buoyed the latter's stock up by 9.75 per cent in Monday's trade.
The sum of Rs 3,062 crore that Nippon is agreeing to pay for the stake values Reliance's Life insurance business alone at Rs 11,500 crore. This deal may lift the market value of Reliance Capital given that Reliance Capital today enjoys a total market capitalisation of just Rs 13,804 crore encompassing broking, consumer finance, mutual fund and general insurance operations. Reliance Life Insurance is the biggest contributor to the total market value of Reliance Capital. However, investors should note that the markets usually value businesses held through a subsidiary at a 10-30 per cent discount to the underlying value — called a holding company discount. Reliance Capital has so far infused Rs 3,100 crore into its life insurance subsidiary.
Beyond guess
The deal price seemed to be higher than market expectations because data available from three leading brokerages' research reports (Macquarie, Edelweiss and ICICI Securities) peg the value of Reliance Life Insurance in the range of Rs 6,376 crore-Rs 7,810 crore based on its 2011-12 financials as against the Rs 11,500 crore value assigned in this deal. These reports were released by the respective brokerages before the deal was announced (February 2011).
While Macquarie Research assigned a gross value of Rs 7,810 crore to the life insurance business, it arrived at a lower ‘net' figure owing to the capital infusion done by Reliance Capital. Reliance Capital till December 2010, had infused Rs 3,100 crore into the life insurance business. An analyst from an international brokerage research firm, Execution Noble was quoted in a news report saying that they had valued the firm almost at the current deal value.
Execution Noble in February 2011 had set a target price for Reliance Capital at Rs 881 a share as against the current market price of Rs 562. Reliance Life Insurance has an eight per cent market share in the private sector life insurance.
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